Manufacturers Move Higher, but Defense Slips

Following Thursday's announcement of a new round of monetary stimulus by the Federal Reserve, manufacturing built on the week's strong performance by adding another 1% Friday, leading Dow Jones Industrial Average gains of about 0.4%. Anticipating higher home values in the United States, construction equipment suppliers racked up additional gains, but the biggest price movers were Indian manufacturers.

Less red tape in India leads to gains
India's massive economy has long been held back by regulations prohibiting multi-national companies from owning domestic businesses. On Friday, after months of consideration, Indian Prime Minister Manmohan Singh opened the door for greater foreign investment in his country by announcing that foreign firms could enter the commercial retail and civil aviation sectors.

The measures are likely to generate economic growth throughout the entire Indian economy and, as a result, Indian companies listed on American exchanges were up strongly on Friday. Sterlite Industries (NYSE: SLT  ) posted some of the market's largest gains, up nearly 8%. The copper manufacturer's finished products are used in the power generation and residential construction industries, with a large installed base in India.

India's Tata Motors (NYSE: TTM  ) gained 6% on the news, despite the fact that the company derives most of its revenue from its Jaguar Land Rover brands, which have a smaller presence in India. Perhaps investors foresaw a strengthening Indian economy leading to greater demand for the company's low-cost offerings in India.

Defense contractors underperform
With the opening of India's aviation industry, one might expect good news for commercial jet builder Boeing (NYSE: BA  ) today, but the company significantly lagged both the Dow Jones and the capital goods sector, down nearly half a point. Boeing gets only about half of its revenue from commercial aviation, the other half coming from its work for the U.S. government as a defense contractor. This sector was broadly down, with Raytheon (NYSE: RTN  ) and Northrop Grumman (NYSE: NOC  ) , two of the largest providers of weapons, technology, and support services to the American military, both down over 1%.

Short term, investors may be reacting to news out of Europe that EADS, the aeronautics company behind Airbus, the world's best-selling line of passenger planes, is planning a merger with BAE Systems, one of the world's biggest defense contractors. The combined company could become a tough competitor for defense contracts.

The bigger threat to defense contractors, however, is the politics of the American military budget. A crisis is brewing, as automatic spending cuts are set to kick in on Jan. 1st, 2013, triggering across-the-board reductions in military spending. American defense contractors are typically dependent on government spending for more than two thirds of revenue, so any cuts in military spending will hit earnings hard.

The next President, whether Obama or Romney, will have to deal with the planned budget cuts as quickly as possible. Political issues can weigh heavily on investment decisions but, luckily for individual investors, the Motley Fool has put together a free report on how to profit no matter who wins the election. It's important to have an investing strategy in place well before the election, and this report is only available for a short time, so download your copy today.

Daniel Ferry owns shares of Tata Motors. The Motley Fool owns shares of Northrop Grumman and Raytheon. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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